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Security Token Offering: Compelling Regulatory Opportunity for India Part 2/3



FINMA –Uncertificated Securities

The Swiss Financial Market Supervisory Authority FINMA issued ICO Guidelines on February 16, 2018 to provide information on how it will deal with enquiries apropos the supervisory and regulatory framework for ICO. The Guidelines establish that FINMA aspires to base its assessment on the underlying economic purpose of the ICO, more predominantly where there are hints of an attempt to outwit existing regulations.


The Financial Market Infrastructure Act 2015 (“FMIA”) construes ‘Securities’ as standardized or uncertified securities, derivatives and intermediates securities, which are suitable for mass standardized trading. FMIA defines uncertificated securities as ‘rights which, based on a common legal basis (i.e. association/ issuance conditions), are issued or established in large numbers and are generically identical. Under the Code of Obligations, the lone formal obligation is to keep a book which details of the number and denomination of uncertified securities issued and of creditors are recorded. This, the Guidance notes, can be achieved digitally on a blockchain.


FINMA delineates explicitly and rightly that payment tokens are not securities. Utility tokens are not securities if their sole objective is to bestow digital access rights to an application or service and if the utility token can truly be used in this way at the point of issue. In these cases, the underlying motivating function is to grant the access rights and connection capital markets, which is atypical feature of securities, is missing. If a utility token is merely utility as an additional feature and mostly for investment purpose, FINMA would treat it as securities. Asset tokens which are tokens backed by real assets are unambiguously treated as securities by FINMA, if they represent uncertified security and are standardized and suitable for mass standardized trading.


The issuing of tokens that are analogous to equities or bonds can also ensue prospectus requirements under the Swiss Code of Obligations. FINMA has no direct responsibility in this area but expects ICO organizers to themselves clarify these requirements. According to the draft Financial Services Act (FinSA) prospectus requirements will become part of supervisory law. (Art. 37 Draft FinSA). The Swiss Code of Obligations and FinSA provide for a number of different exceptions and exemptions.

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